Our business more than money and numbers

Think your losses were bad this year? Spare a thought for those who suffered real losses.

Tuesday, December 18th 2001, 8:01AM

It's traditional at this time of the year to be a little circumspect and look back over what has happened in the past 12 months. Most of the attention, understandably, is on some of the awful tragedies which have taken place around the world. These events have touched the lives of everyone on both an emotional and a financial level.

They also help to illustrate the point that financial services isn't just about money and numbers - people and events play a big role.

At this time of reflection spare a thought for those who have suffered personal losses which make a portfolio going backwards by 20% seem trivial.

It's sounds a bit trite in the circumstances to say it but 2001 has been an eventful year within the financial services industry in New Zealand, and some big challenges have been laid down for the next 12 months.

Managers, investors and advisers have had to contend with falling markets and poor fund flows, major financial planning firms have changed hands, the sharebroking industry has experienced major rationalisation and the Government has set up Finance Minister Michael Cullen's much-cherished super fund.

It's also been a bit crazy. Who would have thought luminaries such as Graham Rich would fall from grace, financial planning grandfathers Roger Moses and Gary Stevens would end up in court facing criminal charges. Sovereign would be so crazy as to entertain the idea of running a $1 million lottery for advisers and Armstrong Jones would run an insurance-like sales incentive programme for advisers who sold one of its managed funds?

Whether you like it or not the funds management industry is driven by one thing. Good returns. A fund has to keep performing to remain on an adviser's recommened list (and the increasing numbers of online brokerage houses). This performance drives funds flow, which generates the profits to keep the industry running.

With returns down about 18% in international markets it was going to be a tough year.

But all this bad news, which has been compounded by the bursting of the tech bubble, has helped investors mature.

Instead of a wave of panic selling after September 11 investors have hung on and there is evidence that money has continued to flow (trickle?) into growth sectors such as international shares.

The latest fad is hedge funds (in all their glorious permutations). It can be argued the plus here is that hedge funds are a respectable asset class and do have a role in a properly diversified portfolio. At this stage the exuberance they are generating appears to be more rational than that associated with the tech bubble.

The industry seems to have survived and is in good heart. This is thanks in part to the performance of the New Zealand market, and the fact that the Government is starting to take the savings issue seriously.

The success in weathering a difficult year is not a signal for complacency. There are some real issues on the horizon that the industry will have to confront next year.

One is adviser regulation. The message should be set your own high standards or they will be set for you.

The sad thing right now is that many in positions of power seem to be blind to what is happening.

Can't they see that the new chairman of the Securities Commission means business? The Government has also shown it's prepared to act (just look at what it is proposing for the medical profession).

Likewise, fund managers will be in the spotlight. There is a real possibility that their businesses will face some sort of regulation, as do all their peers (and in many cases parent companies) in other jurisdictions.

Another issue is fees. In falling markets advisers have a much harder job to justify the fees they are charging. If they are seen to be too greedy when their clients are losing money they too face a backlash.

Last, but by no means least, the fierce battle for market share will intensify.

Everyone deserves a well-earned break, but make sure you charge your batteries and are prepared for what will undoubtedly be another tough battle next year.